In Search Of Agility 2In Search Of Agility 2

A 10-year, $800 million deal to build a case-management system for the United Kingdom's Child Support Agency also is in jeopardy because of technical problems. In July, Sir John Bourn, head of the United Kingdom's National Audit Office, said in a report that the system wasn't living up to expectations and called the results of the program "disappointing." One analyst believes EDS may end up terminating that contract as well. The company's well-publicized troubles, along with a downgrade of its debt to junk status by Moody's Investors Service, are "something you have to sell against," Jordan concedes.

Some customers say that the positive changes Jordan has brought to the company outweigh the negative headlines. In December 2003, Blue Cross Blue Shield of Massachusetts signed a $320 million, multiyear contract renewal with EDS. The insurer's CIO, Carl Ascenzo, has noticed the same thing Nextel's LeFave has: Since Jordan's arrival there has been a noticeable uptick in morale of the EDS staffers with which he deals and customer service has improved. "They've become easier to work with," he says. Accountants from Blue Cross Blue Shield of Massachusetts went over EDS's books before he renewed the contract. "We concluded that their [financial] situation wasn't of a magnitude that would cause us any problems," says Ascenzo, noting that the insurer conducts similar due diligence with all its major vendors.

DaimlerChrysler AG also had sufficient confidence in EDS to commit to a long-term deal to consolidate and standardize the automaker's IT infrastructure, according to a DaimlerChrysler spokesman. EDS brings specialization and expertise in areas the company needs, such as server management, he says, so DaimlerChrysler gets more value than if it had done the project itself. "We weren't concerned about their financial situation when we made the deal," he says.

Some industry watchers believe, however, that EDS still faces significant financial challenges that are hampering its ability to capture new business and invest in training and technology development. EDS this year will generate $100 million in free cash flow, which is generated from daily operations and represents cash that's left after deducting for capital investment, estimates Cindy Shaw, an analyst at Schwab Soundview Capital Markets. That's not enough for a company with more than $20 billion in annual revenue, Shaw says. "Their balance sheet is still comparatively weak."

Some of EDS's biggest rivals can draw upon heavier war chests to pursue engagements. While EDS's free cash flow represents one-half of 1% of revenue, Accenture's free cash flow is 12% of its revenue, and IBM's is 11%.

EDS is counting on the expansion of its business-process-outsourcing services to drive additional revenue. A year ago, it created a BPO services group headed by former Perot Systems executive Guillermo Marmol. The company plans to push more aggressively into fast-growing vertical markets such as manufacturing and human-resources management. "We're gearing up for it," says Jordan, adding that EDS may look at acquisitions or partnerships to build out its portfolio of business-process-outsourcing service offerings.

To ensure that it's price competitive with overseas rivals, EDS is pushing much of its call-center and processing services to near-shore destinations such as Canada and offshore locales such as China, Eastern Europe, and India. "We have to recast our economics to be competitive," Jordan says. The company needs to cut its service-delivery costs by 20%, he says. "That's a big part of our plan to move ahead."

EDS also is partnering with software vendors to build out its business-processing-outsourcing capabilities. In August, for instance, it unveiled an alliance to deploy Siebel Systems Inc.'s CRM software at customer contact centers it runs on behalf of BPO clients.

But at the end of the day, EDS's future success--some say longevity--will hinge on how well customers buy into its agile enterprise strategy and how well EDS executes. Jordan's message to CIOs: "We have to wring the last nickel out of your cost structure to be competitive."